PBGC premium proposal booed by business groups

Updated with correction

PBGC Director Joshua Gotbaum's quest to cut the premiums paid by financially healthy plan sponsors and raise those paid by companies at risk of insolvency is under attack by business groups and others worried that it could further discourage defined benefit plans.

Business groups also are against President Barack Obama's proposal to give the Pension Benefit Guaranty Corp. the authority to set its own premiums.

“Our first concern is turning over authority to them, when it should stay with Congress,” said Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce in Washington. “Our second concern is tying the premiums to risk.”

But the risk-based premium is attracting the most criticism.

Basing a company's premiums on its financial condition “is a terrible idea,” said Mark Ugoretz, president and chief executive of the ERISA Industry Committee, a Washington watchdog group representing major employers. “The PBGC is losing its customer base already. This is just going to chase away customers who have to compete with the guy down the street who doesn't have a defined benefit plan.”

Pension expert Douglas Elliott, a fellow at The Brookings Institution in Washington, thinks the alarmist view “is absolutely a red herring.”

“There are many, many reasons defined benefit plans have been in decline. The premiums have almost nothing to do with it.”

Mr. Gotbaum believes his risk-based approach could give defined benefit plans a boost.

“We're trying to give an incentive for people to stay in defined benefit plans,” he said in an interview. “It's very true that the government makes it harder for people to offer them. This is a step to say, "We know that you're financially sound and we want to encourage you to stay here.'”

Plus, he argues, it's better than raising everyone's rates. “Three-fourths (of plan sponsors)will never need us, but those three-fourths are paying for the others.”

Mr. Elliott agrees that companies would be better off under a risk-based system. “Even doubling the premiums would not make a difference in a multitrillion-dollar defined benefit system. It's very unlikely that this is the theoretical straw that broke the camel's back. People don't like paying premiums, period.”

That point was made clear in a June 6 letter to all members of Congress from an eclectic group that included ERIC and the Chamber of Commerce. “We understand the pressure to address the budget deficits, but massive increases in PBGC premiums are not the solution,” the letter said. Raising premiums without contextual reforms to the PBGC or its system “amounts to a tax on employers who have voluntarily decided to maintain defined benefit plans.”

That criticism is getting attention on Capitol Hill, where some lawmakers are skeptical of the PBGC's ability to fix longstanding governance and management issues identified by the Government Accountability Office. They caution that the agency must first rebuild trust with the pension community. But congressional sources also point out that, because no one can afford to overlook revenue opportunities, lawmakers are listening to what PBGC officials have to say.

Mr. Gotbaum took the helm at the self-financing government entity in July 2010 after a varied career that included stints on Wall Street and handling an airline bankruptcy. He wants to get the PBGC on more solid long-term footing and reduce its $23 billion deficit between assets and long-term obligations before another crisis hits. He wants companies at risk of defaulting on pension obligations to plan ahead as well.

Congress has raised PBGC premiums 10 times since the agency's creation in 1974. In February, the president's fiscal year 2012 budget included a provision to give the PBGC premium authority and raise $16 billion in new revenue, with the endorsement of several bipartisan commissions. That's when Mr. Gotbaum saw his chance to try a new approach.

“Premiums are going to go up” no matter who is in charge, he said in the interview. “The question is, do they have to go up the same way that they always have in the past?”

Sponsors now pay a flat rate of $35 per participant per year, and $9 per $1,000 of underfunding. That averages out to $65 per participant, or about 3.5 cents per hour per employee, according to PBGC calculations.

Most companies would see no increase or even a drop in premiums under the risk-based concept. But rates would almost triple for riskier companies.

It is not the first time these ideas have been floated, but supporters and critics agree this fiscal climate could make a difference.

“The (PBGC) deficit is larger than in the past and this growth is projected to continue,” said Phyllis C. Borzi, assistant labor secretary for employee benefits security. Ms. Borzi's boss, Labor Secretary Hilda Solis, chairs the PBGC board of directors. “At the same time, people have a more realistic view now that structural changes to the PBGC program are going to be needed,” Ms. Borzi said.

Like Mr. Gotbaum, Ms. Borzi stresses that nothing is going to be rushed, with a two-year period of consultation before the board considers restructured premiums.

“This provides sufficient time for the board to conduct a transparent process that involves gathering input from all of the outside stakeholders to shape a workable proposal.” But she believes that support for risk-based premiums is growing, as policymakers focus on the country's long-term deficit. “These groups prefer that Congress take action now, rather than allow the growth in PBGC's liabilities to dig the agency even deeper into a hole.”

While the reforms won't make the deficits disappear, she said, “they do help take the first steps.”